NZ dollar outlook: Kiwi may gain on hopes of Fed, EU support

BUSINESSDESK: The New Zealand dollars may rise this week on speculation the European Central Bank and the Federal Open Market Committee will announce additional policy measures to shore up the global economy.

The kiwi recently traded at 80.93 US cents, little changed from 81.05 cents at 8am. That is right in the middle of this week's trading range of 78 cents to 82.10 cents, according to a BusinessDesk survey of six analysts.

Four out of the six predict the kiwi will finish the week higher, one lower and one refused to comment.

ECB president Mario Draghi’s pledge last week to do "whatever it takes" to preserve the euro has been supported by German Chancellor Angela Merkel and French President Francois Hollande, who said they will do “everything” necessary to protect the single currency.

Germany and France are “bound by the deepest duty” to keep the 17-nation bloc intact, they said in a joint statement.

“The kiwi will be relatively well supported in this environment,” said Alec Sinton, senior dealer at ANZ New Zealand. “I would be surprised to see it below 80 cents.”

Germany and France’s support echoes a promise from Mr Draghi to buy Italian and Spanish bonds in unlimited quantities to accelerate efforts to ease the region's crisis.

Market reaction to his comments will come swiftly. Spain, Italy, Germany and Belgium are all set to sell debt this week. Last week, Spain's 10-year yield fell 52 basis points to 6.74%, the biggest weekly drop since December 2, according to Bloomberg, as the nation appeared closer to asking for a 300 billion euro bailout.

The Fed's two-day policy meeting starts on Wednesday and follows a government report on Friday which showed economic growth in the world's largest economy slowed in the second quarter. That has underpinned further hopes the Fed will be forced to stimulate the US economy.

"Comments we had last week from Draghi and the previous week from [Fed chairman Ben] Bernanke show both are prepared to do what is necessary but the question is when they are prepared to act," said Peter Cavanaugh, senior client adviser at Bancorp.

In the US, the earnings season will continue to set the tone for equities with Kraft Foods, MasterCard and General Motors all reporting this week. Two-thirds of the 290 companies in the Standard & Poor's 500 that have reported so far have surpassed expectation, even as the outlook for the next quarter deteriorates.

Third-quarter earnings are now forecast to fall 0.4% from a year ago, compared with an expected increase of 1.4% last week, Reuters said.

China, New Zealand's second largest export market, will release its official performance manufacturing index on Thursday.

Last week trans-Tasman currencies got a lift after the HSBC purchasing managers' index showed a gentler pace of contraction in Chinese manufacturing than expected, stoking optimism the world's second-biggest economy won't face as harsh a slow-down as feared.

New Zealand's building consents for June is set for release today from Statistics NZ. That is followed by the National Bank Business Outlook tomorrow and Fonterra's GlobalDairyTrade auction on Wednesday morning.

The ANZ Commodity Price index is out on Thursday.